Have the Democrats Just Been Br’er Rabbited?

by Paul Kasriel, The Econtrarian, former Chief Economist, The Northern Trust Company

“Do Anything You Want to Us, Br’er Democrat, but Please Don’t Force Us to Make Permanent the Bush Tax Rates for 98% of Households,” Pleaded Br’er Republican
(with apologies to Joel Chandler Harris)

This is not intended as a politically-partisan note, but rather a description of strategic bargaining in action. To wit, did the Democrats just get Br’er Rabbited by the Republicans with the enactment of the American Taxpayer Relief Act (ATRA) of 2012, the legislation that made permanent the Bush 43-era individual income tax rates for the first $450k of household income? The CBO estimates that ATRA will reduce individual federal income tax revenues by $3.75 trillion in the 10 years ended fiscal 2022 compared to what would have been.

Both Democrats and Republicans have been advocating a roughly $4 trillion cumulative 10-year reduction in deficits projected under tax-and-spend schedules prevailing in 2012.  The Democrats have been arguing for an approach to long-run deficit reduction that is “balanced” between increased revenues and decreased expenditures. But if you have just reduced 10 years of revenues by $3.75 trillion compared to what they would have been with the expiration of Bush 43 tax rates for all, how are you going to come close to $4 trillion in 10-year deficit reduction without massive cuts in federal expenditures?

With the enactment of ATRA, the exceptionally low individual tax rates that apply to most households are permanent (until legislation is passed to change them) – something Republicans have long sought.  Something else that the Republicans have long sought is a reduction in future deficit by curbing expenditures. If the body politic is serious about slowing down the growth in public debt (I am not sure it really is) and $3.75 trillion of revenues have been forfeited to that end, then massive expenditure cuts are the alternative by default, or there will be a default.  Br’er Republican pleaded not to be thrown in the ATRA “briar patch” by Br’er Democrat to no avail. It would appear that Br’er Democrat just got outfoxed by Br’er Republican.